Hyperinflation is that transition period when a paper money is clearly failing as a store of value but has not yet died as a medium of exchange. This blog is to look at this and any other interesting economic issues. Vincent Cate

Tuesday, September 17, 2013

Good Paper on Four Hyperinflations

The paper, The Ends of Four Big Inflations, explains what happened in 4 hyperinflations after WWI. In each case the government was spending far beyond their taxes. In each case the inflation ended when they got their deficit under control. I believe this is true for all hyperinflations and can not find any counterexamples.

This was recommended to me by Tom Brown and Michael Salemi. Thanks to you both! I now recommend this paper to you.

4 comments:

"In each case the inflation ended when they got their deficit under control. I believe this is true for all hyperinflations and can not find any counterexamples."

Are you sure that the inflation "ended" when they got their deficit under control? Is the total destruction of a currency's purchasing power properly described as "ending inflation". For instance, the hyperinflation of the German Papiermark did not actually "end". The Papiermark currency was replaced with another currency unit, meaning that Papiermarks were essentially worthless when the replacement Rentenmark was issued in October 1923.

I mean that hyperinflation under that government ended when that government got its deficit under control. It does not really seem to matter if they make a new currency or keep the old one, except that there are usually too many zeros on the old one by then, and a lot of bad feeling toward it. So in practice it probably is good to make a new one.

Here's an excerpt from The Economic Consequences of the Peace by John Maynard Keynes where Keynes talks about the same thing. I think the paper actually refers to Keynes if I remember correctly.http://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_inflation.html

The key to understanding the link between deficits and inflation is, I think, the nonlinearity that develops when government debts get really high. I know that I talk about this all the time, but it's absolutely crucial because central banks are forced to peg their yield curve when debt service costs become a very high percentage of tax revenues. Eventually, a debt restructuring and massive austerity is effectively forced.